ENERGY CRISIS

AROOJ ASGHAR  
(feedback@pgeconomist.com)

May 17 - 23, 2010

Prime Minister of Pakistan called the national energy conference last month and invited all the four chief ministers along with sector experts in the meeting. Unanimous declaration was announced which covered two holidays in a week in government departments; closure of all business and trade centers by eight in the evening; slash of supply of electricity to KESC by PEPCO by 300 MW; less usage of electricity in all state offices including President and Prime Minister Houses; no supply of electricity to tube wells during peak hours; no electricity for bill boards; three hours electricity for marriage halls in night; supply shutdown to all street lights; no usage of air conditioners before 11 in the morning etc.

These measures should be taken long time back yet they are in the right direction. However, these measures are best in conserving electricity however nothing concrete has emerged so far on permanent generation.

No nation can overcome any crises without unity. It's a high time when we all support state, support each other and also realise our national responsibility. It is being said that businesses will be ruined because of early closure of markets. It is difficult to comprehend how early close of shops can decline the business. Presently purchasing power of people doesn't allow them to shop for fun. Customers will buy their necessities whenever they need regardless of time, if previously they shopped at 10 now they are to shop at 6. End of the day there would not be any difference. We are reluctant to change.

People in the ministries are becoming habitual of finding temporary solutions to energy problem. We start counseling in summer months and put it in cold storage during winter. Since long people are witnessing signing of MOUs with foreign and local investors while PPIB and AEDB keep on issuing letter of interest but no real development is on radar in the power sector. This raises serious concerns among economic circles as country is facing huge shortfall of electricity which will further increase if no steps are taken even now. Load shading has badly affected the businesses and made it difficult for local exporters to compete with the international market.

There is absolutely no doubt left that policy makers have miserably failed. Ministry has again underperformed and is now under tremendous pressure from the government, people and investors. Pakistan's current electricity crises are because of multiple issues ranging from policy failure to lack of responsibility, from greed of return by private investor to lack of experience in the private sector, from nation's consumption behavior to nature (depletion of gas reserves/no oil reserves/lack of water for coal mines), from corruption in state utilities to lack of political instability.

Due to weak grid infrastructure and substantial theft of electricity, an average of approximately 22 per cent of revenue has lost to the transmission and distribution network over the last 10 years. In order to reduce these losses, WAPDA through NTDC and DISCO have taken various steps including improving efficiency and infrastructure but a lot needs to be done. Nothing material has been done in introduction private sector in transmission and distribution system.

Another reason for less availability of electricity is the theft of electricity. According to an estimate, annual loss of electricity amounts to at least Rs150 billion. KESC has taken various measures to clip the theft and runs an aggressive awareness campaign. It is hoped that KESC will control significant portion of its electricity theft by the end of next year.

There are various projects which could have been done by WAPDA but Ministry barred it from further investment because of its poor financial condition and uncontrollable corruption.

There is a deliberate hype that companies can only be run successfully in the private sector and running the business is not the job of the government. Any company can have losses, even there are examples where IPPs' (either in operations or in construction) are in miserable financial condition, local lenders are suffering and have virtually lost their investment. Financial, technical and commercial performance is all about management and governance. If the affairs of WAPDA are not properly managed then it doesn't mean that it can only be manageable in private sector or barred it from further investment. Government should allow WAPDA to invest in thermal power plants and small hydro projects as well.

Blaming government for this shortage is not entirely correct. Investors are also putting their share in this crisis. New local players have entered in the market and are exploiting the situation. Most of the power plants under construction these days are delayed by many months. Almost all have technical issues, construction contractor of two under construction power plants went bankrupt; generator, turbine and other technical issues emerged in all other plants except a few power plants which are now online namely Engro, Saif and Attock however fixing the problem is taking time.

Currently about 33 per cent of Pakistan's power supply is based on imported oil, 30 per cent on natural gas, 33 per cent on hydro and remaining on coal, nuclear and renewable electricity. While looking at the Pakistan's power portfolio it appears that it is an oil rich country. Presently, Pakistan has lot of oil fired power plants and with the passage of time their efficiency is reducing even though certain deficiencies are restored after annual outages or major overhauls. Besides permanent deficiency, which can't be restored, continuous hike in furnace oil prices make it unviable today and even in future as well. Keeping in view the current power mix, it is essential to concentrate on indigenous and cost effective sources for power generation.

In addition to the huge financial burden on the economy and on the people, the situation also raises some new issues of the security of oil supplies. Secondly, expensive fuel is not the only issue; fuel handling capacity in Pakistan is also an emerging issue. Fuel handling capacity in Karachi is reaching its maximum and with the construction and operation of new sea port at Gwadar, the problem doesn't seem to resolve as since long fuel has been transporting from Karachi to the rest of the country.

The transportation system from Gwadar needs a time test. As 33 per cent of the power generation is based on oil therefore any hindrance in the transportation of oil can cause severe damage to the economy. In short, time has proved that the best solution for all such problems is encouragement and development of indigenous resource. The more we rely on foreign expensive source the more we would be inviting complications and difficulties for ourselves.

Rental power can be a short-term solution for current crisis but the price government is willing to pay to the sponsors of rental power is immense, which is unaffordable.

For a second, just assume that the country can afford such huge price then what will be the fuel of those plants, oil that is imported, gas which is presently in scarcity in the country, coal but mines are not yet developed. Most of the rental power plants are oil based whereas a few are on gas though gas fired rentals power plants are non-operative since installation but are getting fixed monthly payments. Therefore, one can easily imagine how rental power plants can generate electricity when WAPDA is already not operating oil fired power plants due to their high cost.

Most of the IPPs are based on expensive imported oil which further dents the cash flows of the state utility.

Circular debt is yet another reason for the current shortfall in electricity. Circular debt basically arises because of non-payment of dues by the buyers to the sellers. PSO gets advance from IPP for the procurement of oil. On the other hand IPP can only pay in advance if they get payments from WAPDA. Likewise, payments to gas supplier can only be made if IPPs receive funds from WAPDA. Needless to say, WAPDA can pay in time, if they have funds and get subsidies in time from the ministry. Government has taken various steps in past and is also trying to reduce the circular debt through financial support to WAPDA. Ideally there should not be any deficit which is to be filled in by the government.

The government was subsidizing electricity in the country but it lifted the subsidies on dictate of IMF. Prime Minister has announced to fund the present circular debt. The circular debt can only be eliminated permanently if WAPDA improves its financial position through good governance, technical improvements, controlling line losses, and at least selling electricity at a price on which it is getting. The subsidies should be given at a level rather than for everyone. However, we strategically made a mistake in past by installing power plants on imported oil. Pakistanis will keep on suffering with every increase in oil price in international market.

Our first choice should be hydro power and indigenous coal for power production but the biggest irony of Pakistan is that we have made our best hydro projects controversial without realising what we have done with our country only because of little or almost no knowledge about those hydro projects. In near future, we will be facing water crises as well. Thus it leaves coal, which Pakistan has in abundance, as a safe, cheap and reliable source to meet the power needs of the country for the foreseeable future.

Essentially indigenous coal-based power will bring various benefits for Pakistan; first and foremost benefit would be immense savings in foreign exchange on import of expensive oil. Coal based power plants are labor intensive and will create thousands of new jobs and various other new business opportunities at plant site in particular and in rest of the country in general. It will also provide power security and protection from a wide range of external risks. In order to compete Pakistani goods in international market, it is fundamental that the cost of electricity should be decreased significantly or at least supply uninterrupted. Non-development of indigenous resources and government's apathy are making things quite miserable.